Why Indian Startups are not successful

India is the third-largest startup hub in the world. The IBM Institute for Business Value and Oxford Economics survey highlighted that the success rate and participation of Indian startups were improved in the last four years.

Global Startups success ratio, only 1% become UNICORN startup

This study based on the startups headquartered in the US and raised their first equity funding by the seed funding rounds in 2008,2009 or 2010, also has enough time to raise the funds in next funding rounds and exit.

It’s well known that only 10% of startups successful, 9 out of 10 startups fail at the early stage.

A research report published by CB insights, give us the ideas where these startups begin and at which state startups funding lifecycle were lost the momentum to get funds.

This report is a cohost study of 1,119 startups, which started with first seed funding and lost momentum to get new funding.

Venture Capital funnel
Image Source- CBInsights 

The question is, what are the founder’s expectations?

  • 67% of startups fail to raise follow-up funding after the first round of funding. Only 33% of startups founder will able to exit or raise further funding.
  • This report analyzed 1,100 US-based tech startups that raised an initial round of funding in 2008-2010.
  • The outcome is that 48% of startups qualified to complete the second round of funding and from these startups, only 15% of startups access the fourth stage, Series C funding round.

An interesting data comes out about at which stage the journey of startups comes to the end to get new funding.

  • 48% of early-stage startups able to complete the second round of funding.
  • 30% of seed round supported startups exited through the IPO, the ratio is in the uptrend.
  • 67% of startups founder fails to raise further funding and become dead or self-maintained(manage fund by internal source). This ratio is increasing year-on-year by 3%.
  • Out of 1,100 startups on 12 startups become Unicorn companies. Nearly 1% of startups achieve this level. From these 12 some are top companies of a decade, including Uber, Airbnb, Slack, Stripe, and Docker.
  • 13 companies, which means 1% exited (acquired by the market leader) at the level of $500M, categories like Instagram, Zendesk, and Twilio.

Global startups success and Funding

From 1,100 startups, around 48% of startups raise the first follow-up round of funding. From this 48 %, around 63 % went to raise the next follow-up round of funding Series B.

The average time between two rounds was recorded around 20 months, but the study points out that late-stage success startups raise funding within 5 months. It indicates that investors were shown more excited to invest at a late stage in startups.

The average amount within deals was $350K at Seed rounds, the overall average was $670K per deal. This gape was increased with time, it shows bigger deals in the late-stage rounds.

By the sixth follow-on round, the median round amount was $40M but the average was $120M. The important note is that the Seed funding is not so prominent at that time as now.

Analysis of Global startups figure

From 1098 traced tech startups that raised Seed funding rounds in 2008-10 in the US, less than half 46% managed to raise the second round of funding.

  • Every round makes hopes for the companies to raise the next round of fundings, but the data reveals that only 14% of companies succeeded to complete the fourth round named Round C.
  • The data shows that only 306 mean 28% of startups raised seed funding round in 2008-10 were exited through an M&A or IPO within six rounds of funding.
  • Less than 1%(0.9%), only 10 startups completed the journey from seed round to become a UNICORN company, join the club of $1B. From these startups, some UNICORN becomes companies of the decade, including Uber, Airbnb, and Slack.
  • 70% of startups end up either dead or become self-sustained.

Indian startups statistics and Factors

India is the third-largest startup hub in the world. The IBM Institute for Business Value and Oxford Economics survey highlighted that the success rate and participation of Indian startups were improved in the last four years.

Earlier the success rate of Indian startups is very poor because of the lack of innovation.

  • 77% of venture capitalists surveyed believed that the Indian startups suffered by a lack of innovation in technology and unique business models.
  • India filed 1,423 international patents in 2015-16, Japan filed 44,235, China 29,846 and South Korea 14,626. The number is comparatively very poor.
  • The spending on research and development is not so significant in India. Successful Indian startups are based on global ideas.
  • An estimated 80,000 jobs had been created by Indian startup technology firms, as of 2015.
  • 90% of Indian startups fail within the first five years, the most common reason for failure is lack of innovation.

Also Read: 10 Top funded Indian startups: raised a record of $7.52B funding

Lack of innovation in Indian Startups

The reasons behind the high failure rate are lack of skilled workforce, funding, inadequate mentoring and poor business ethics.

Indian startups follow successful global ideas , to fulfill the local needs. Indian startups follow the existing models and execute in India with some changes, like Ola for Uber, Gaana for Spotify, OYO Rooms for Airbnb and Flipkart for Amazon.

India is the third-largest startups’ hub but doesn’t have global startup such as Twitter, Google, Facebook. China developed its own Google named Baidu, and Alibaba replaced Amazon.

Since  2015, a total of 1,503 startups closed down in India, not because of lack of funding but lack of innovation. Most of these startups were replaced by Western business models.

Highest failures were seen in logistics, e-commerce and food technology.

“We believe that startups need to focus on healthcare, sanitation, education, transportation, alternate energy management and others, which would help deal with the issues that India and the world face.”

Nipun Mehrotra, chief digital officer, IBM India/South Asia

The Hope- Global Innovation Index

In The Global Innovation Index, India is improving its place from 81 in 2015 to 52 in 2019. India had ranked 81 in 2015, which rose to 66 in 2016, 60 in 2017, 57 in 2018 and 52 in 2019.

India had improved its position by 29 places in the Global Innovation Index, since 2015.

The improvement in the Global Innovation Index, suggesting that the Indian entrepreneurs now focusing on innovation and startups ecosystem dependent on the innovation.

The reason for the failure mentioned in the report of the IBM Institute for Business Value is somehow addressed.

Improvement in the GII is a good sign for the Indian startups ecosystem.

Following existing models

India to now taking steps to counter the problem. The initiative of Startup India, Digital India, Skill India, and other incubation programs, all these measures are improving the startup activities. But the main problem is the innovation and that needs a huge investment in R&D. 

Entrepreneurship is a by-product innovation. India must come out from to-follow to to-lead stage.

HNIs, Angel investors and early-stage VC

Many HNIs, Angel investors and early-stage VCs are ready to invest in the Indian Startups, and they burnt their hands by investing in the exiting copy-pasted ideas. Still, they are hopeful and investing with more intelligence and demanding the use of high technology in the business models.

These investors are now focusing on the use of Artificial intelligence, Deep Learning, Quantum Computing, Robotic, and other innovative technology in the high growth sectors. The phenomena US start today India starts tomorrow needs to change.

Spending on R&D, to improve Indian startup ecosystem

Education level in India world score
Image Source-livemint

Unlike Israel, India is not investing much in the field of Research and Development.

  • The study found that poor performance in human capital in India is because of the very low expenditure on education in India.
  • The ITIF report ranks India 35 out of 51 countries on top-ranking universities in a country, India counted only 17 universities among the world’s top 800 universities.
  • Per capita, government funding of university research only amounts to $12 in India.
  • India also among the bottom sixth, in Citable Documents and Total Citations per 1,000 citizens.
  • India has only 15 researchers per 100,000 people.
  • Government funding of university research (per capita) -India’s ranked among the bottom six, behind countries like South Africa and Brazil.

In a survey conducted by the Information Technology and Innovation Foundation (ITIF), India is at the bottom of a total of 56 countries on global innovation.

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